In a surprising move, Blockbuster Inc (BBI) offered over $1 Billion to buy Circuit City (CC) to create a potential “game-changing retail concept” to merge media content with electronic devices.

MarketWatch (and other sources) reported today the announcement which has the approval of Carl Icahn, an activist shareholder with a seat on Blockbuster’s board.

According to the article, “Jeffrey Logsdon of BMO Capital Markets downgraded Blockbuster to market perform from outperform following the announcement, saying the bid creates a two-front war.”

The proposal comes on the heels of a vast restructuring at Circuit City, which has shaken up its management ranks, overhauled operations, slashed expenses, and boosted its customer-services efforts in an effort to keep up with rivals like Best Buy (BBY).

“We fail to understand the strategic value of the company’s hostile bid for Circuit City and believe the combination has the potential to divert management and financial resources from the company’s nascent recovery,” he said in a note.”

Interestingly enough, the article challenges how Blockbuster will finance this large transaction, which is over 5 times the amount it has reported in cash as of last quarter (Blockbuster reported having $184 million in cash as of last quarter).

“Why bid for retail brick and mortar space at a time when the video industry is going digital?”

“Now that Circuit City appears to be in play, who else will enter the arena?”

Let’s look at the charts of the stocks in play. As expected, the company MAKING the offer suffered a decline while the company potentially being acquired experienced a large upside gap (almost +50% at the intraday high):

Blockbuster (BBI) Daily:

Blockbuster (BBI) Weekly:

Circuit City (CC) Daily:

Circuit City (CC) Weekly:

Keep in mind other stocks such as Netflix (NFLX) and Best Buy (BBY) may also be affected in the short or longer term by this announcement and take-over should it succeed.

With Microsoft (MSFT) offering to buy Yahoo! (YHOO) and AOL/Time Warner offering a counter-measure (TWX), and the ramifications for Google (GOOG), it’s enough to keep the news traders busy for quite some time!